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Safeway ID Sales for Q1 Up in all Divisions; Lifestyle Concept Sustains

PLEASANTON, Calif. - With 17 Lifestyle concept stores entering their fourth year of accelerating performance, Safeway here has proven the skeptics wrong about the concept's sustained potential to drive sales. The chain's latest quarterly results, released yesterday, included identical-store sales increases at every operating division.

April 26, 2007, 08:00 pm

PLEASANTON, Calif. - With 17 Lifestyle concept stores entering their fourth year of accelerating performance, Safeway here has proven the skeptics wrong about the concept's sustained potential to drive sales. The chain's latest quarterly results, released yesterday, included identical-store sales increases at every operating division.

"This quarter, all 10 divisions had positive ID sales," said president, chairman, and c.e.o. Steve Burd during Safeway's earnings conference call yesterday. "The last time this happened was 2001. Our market share has also improved for the ninth consecutive quarter." Burd attributed the results in large part to the performance of the continually growing segment of Lifestyle concept stores

Total sales and other revenue increased 4.8 percent to $9.3 billion in the quarter, compared to $8.9 billion in the first quarter of 2006. Identical-store sales increased 4.8 percent for the quarter. Excluding the effect of fuel sales, identical-store sales increased 4.5 percent. Sales were strong in both perishable and non-perishable products, the chain said.

However, getting some of those perishables to the store has been tougher - and costlier - for the retailer. "Sourcing produce was challenging this quarter," said Burd. "There were cost increases, and we had to source from further distances. However, the situation has been improving."

Sourcing challenges aside, the quality is still there, he said. "I had dinner with an investor recently, and his son, who is a chef, said the quality of our perishables is out of this world - especially compared to a few years ago."

Net income was $174.4 million, or 39 cents per share for the quarter, compared to $142.9 million, or 32 cents per share last year.

Gross profit increased to 29.29 percent of sales for the first quater, compared to 29.10 percent. The increase in gross profit margin was primarily the result of lower advertising expenses, savings from distribution initiatives, and improved shrink, partly offset by investments in price, Safeway said.

The retailer's Blackhawk gift card unit continues to expand, with the cards now sold at more than 63,000 outlets nationwide. According to Burd, Blackhawk is aggressively seeking to grow its unit sales per store, the number of stores offering Blackhawk, services, and markets served by the division. New markets include Mexico and the U.K., and potential future markets include Germany, France, and Austrailia.

One new service is the VISA ReadyLink card, the grocery rights for which Safeway holds. The cards, according to Burd, are issued by state governments as payroll cards, benefit cards, and as reimbursement of expenses. The cards are currently available in Safeway - where they can be refilled or cashed -- but will roll out into other Blackhawk outlets beginning this year.

Safeway invested $385.9 million in capital expenditures in the latest quarter, and opened one new Lifestyle store, completed 23 Lifestyle remodels, and closed seven stores. For the year, the company said it expects to spend approximately $1.7 billion in capital expenditures, to open approximately 25 new Lifestyle stores, and complete approximately 275 Lifestyle remodels.

Safeway confirmed guidance for 2007 of $1.90 to $2.00 earnings per share and $400 million to $600 million of free cash flow; it said it now expects non-fuel identical-store sales to grow 3.6 percent to 3.8 percent for the year.

Safeway operates 1,755 stores in the United States and Canada, and had annual sales of $40.2 billion in 2006.